Need An Investment Plan

[Jason Emery]

I'm back from a hiatus and trying to formulate a real estate investment plan.  Still very new to this but I've been doing a lot of reading in the interim.  I have a job currently as a game programmer in Seattle, which keeps me very busy.  I've been investing in stocks, which has been okay, but it's increasingly risky as the market seems to be saturating on imagined returns.

My goals are to be able to afford a much better home than the condo I currently own and to visit ancient spots in Europe to inspire an eventual writing career (or similar) once I have enough to not need a full time job.  In addition, I want to be able to help people I know locally, setting money aside for that proverbial 'money pit'.

But to do that, I think I should start investing to build that residual income & savings instead of blowing it all on a home.  If I lost my career somehow, right now (imagine a bicycling accident!), I'd have a hard time making payments on the high home prices in this area!  Right now I am very stable and living way under my means, while I have the condo over half paid off.

A lot of what I'm seeing here is nudging me in the direction of turnkey rentals.  This is mainly because I don't have an enormous amount of time to find and manage properties and my risk threshold is low as I've not done this before.  One upside I recently discovered is that the tax benefits on my salary sound enormously beneficial while I'm still in a high tax bracket.

Let's say I could theoretically save up around 250k to invest.  Where would you begin?  Would you start down the road of some of these all-in-one companies that sell and rent for you in, for example, Ohio?  Do people find it unnerving to invest remotely in properties they will never see?

Just as importantly, is there some completely different angle I might consider as a new investor?

[Jon Holdman]

Before investing in any rental property, including turnkeys, you MUST do your own due diligence.  If you look at a turnkey offering and think "wow, that would be worth twice as much here in Kirkland" you are well on your way to being screwed.  What it would be worth locally is absolutely irrelevant to what its worth where it is.  These properties are often marketed to far-away investors with the hope the potential buyer will think exactly like that.  

You must determine what its worth WHERE IT IS.  Often a quick search on realtor.com is all it takes to see its overpriced.  If that quick search looks OK, dig deeper.  Actually do the same analysis an appraiser would.  Find GOOD comps - close, similar, recent, similar condition.  Do your own research on rents.  Best to have your own lender with their appraiser do the loan.  Do your own inspection.  Get on a plane and look at the property in person.  Look at the neighborhood and neighbors.  Easy to make something look good in pictures when you might not want to be there yourself after dark.

Consider the worst case:  You're paying above market price for a place.  The seller and lender are working together to be sure the properties appraise high enough to fund the loan.   Around here, during the boom, a seller would buy and sell several houses at inflated prices, then use those for comps for subsequent loans.  Once you get the ball rolling, its self-maintaining.  The seller promises an above market rent using their own property manager and putting in a tenant with one rent on paper and a lower one under the table.  After a year, the deal expires and the tenant leaves.  The PM says "gee, we can't get that rent, the new rent is lower."  Or (maybe and) "the place needs some work".  You think "this isn't what I signed up for, I'll sell".  Only to discover you're under water and can't sell without bring cash to the table.

Will ALL that happen on a property you buy?  Probably not.  But some parts?  Easily, if you don't do your own due diligence.

Now there may well be reasonable deals out there as turnkeys.  Your returns are always going to be less than if you were doing it yourself because you're outsourcing significant parts of the work.  But I'm also sure there are some really bad deals that will put a naive, lazy investor on the hook for a junker.  People post about them here.  Don't be that investor.  Thoroughly investigate what you're being offered.  "Trust, but verify".  A legitimate seller will have no objections to you doing as much investigation as you wish.